17 Jul 2009

13 Key Factors When Applying for a Home Loan

Living in your own home is a dream that everyone sees. However due to soaring land prices and urbanisation, properties are becoming expensive. And buying one with your savings only is rare. While getting approved for a home loan is a difficult task. The process of applying for a home loan is time consuming and requires a lot of information. That is why it is important to know the following key factors when applying for a home loan.
  1. Credit Scores Credit score is essential in order to get the loan approved. All lenders first check the credit score of the borrower along with other details. Credit score of 660 or higher is considered to be prime while below 620 is believed to be sub-prime. If your credit score falls in prime range, you will have lower interest rate. But if your credit score is considered subprime, you will have to pay much higher interest rate for the home loan.
  1. Your Earnings You will need to show your income and earnings sources in order to let the lender know whether or not you have the financial capacity to meet your monthly repayments. Self-employed applicants will have hard time qualifying for a home loan as lenders believe they have irregular income and higher risk for bad debt. So if you are self-employed, having a prime credit score and large deposit will help get the loan.
  1. Home Equity Another important factor to think about is equity in your home when applying for the loan. Dropping home values have left many borrowers (homeowners) underwater, owing more to their lenders than their home's current market value. A good way to find out the value of the house you are going to buy is to visit a lender and discuss the requirements with him. Homeowners with at least 10-15% equity will have an easier time qualifying for a loan.
  1. Debt and Income Your lenders consider your debt- to-income ratio when determining the risk, and 28/36 is the qualifying ratio. If you already have a loan, you might think that you can easily get new one but that is not the case. Lenders have not only raised the credit scores, they have also become strict with debt-to-income ratios. Some factors such as a high income, a long and stable job history or substantial savings may also help you qualify for the loan.
  1. Money Down While applying for the loan, borrower has to pay a down payment. The more they pay the more equity they have in the share of the house. The amount of down payment depends on the cost of the house. It affects the amount of equity you have in your home compared to your loan. If you put down a larger down payment, you will start off with more equity in your home.
  1. Cash Leftover In addition to a down payment, you will need to have funds available for closing costs like bank account, bonds, and stocks. Don't make major purchases and risk depleting your available funds prior to buying a home. For loan approval, bank usually take an account of your cash leftover details.
  1. Loan Types and Rates It is important to be aware of different types of loans and establish your goals to determine which loan meets your needs. If your goal is to reduce your monthly payments as much as possible, you will need to get a loan with lower interest rate for the long term. If you want to increase your monthly payments with less interest, you have to get a loan with lowest interest rate for short term. And if you want to pay off your loan as fast as possible, look for a loan with the shortest term of payments that you can afford.
  1. Lenders Loan Insurance Lenders loan insurance protects the lender if you default on the loan, but not all borrowers pay for loan insurance. Usually, lenders require loan insurance if a borrower puts down less than 20%. You can avoid loan insurance by making a higher down payment or paying a higher interest rate or agreeing to a second loan.
  1. Taxes To reduce federal income tax bill, many consumers rely on their loan interest deduction. Your tax deduction may be lower if you refinance and begin paying less in interest. Increasing the size of your loan due to taking cash out or rolling in closing costs will also impact the amount of interest you will pay. Points paid during a refinance can be deducted over the life of the new home loan. For individual information on the impact of refinancing on your taxes, consult Fast Repay Home Loan.
  1. Pre-approval Lenders need the list of required documents while processing borrower loan application. Lenders review your credit profile and supporting documentation, and if nothing changes, he gives approval for your loan if you put a contract on a house within the specified price range.
  1. Sale Price The price of the house impacts your loan. You will have to pay more down payment if the price of the house is more than the preapproved limit and your monthly housing payment will be high.
  1. Closing cost Lenders charge one time closing costs and these costs represent about 3 to 4 percent of your home's total sale price. These costs include a variety of administration expenses like loan application fees, fees to obtain your credit report, appraisal fees for your home and title insurance.
  1. Honesty Be honest. If you lie, hide or try to change information then you risk being charged with fraud and may never find a lender who will work with you again.
If you have any questions regarding home loan or need to apply for a home loan, Fast Repay Home Loan is ready to help. Contact us at info@fastrepayhomeloan.com.au or call 1300 707 955.

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